CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
An investor holds a portfolio on the CML that is 60% invested in the market portfolio and 40% in the risk-free asset. The risk-free rate is 2%, and the market portfolio has an expected return of 8% and a standard deviation of 12%. The standard deviation of the investor's portfolio is closest to:
The portfolio standard deviation is about 7.2%. Because the risk-free asset has zero volatility and zero covariance with the market, portfolio risk equals the market weight of 60% multiplied by the market's 12% standard deviation.
- A4.8%
- B7.2%Correct
- C12.0%
Explanation
The risk-free asset has zero standard deviation and zero correlation with the market, so portfolio standard deviation = 0.60 × 12% = 7.2%. Distractor 4.8% applies the 40% weight; 12% ignores the risk-free holding.
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